The Impact of Managerial Incentives on IPO Mortality

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The Impact of Managerial Incentives on IPO Mortality
Dimitrios Gounopoulos, Georgios Loukopoulos, and Panagiotis Loukopoulos1
This draft: September 16, 2018
Abstract
We find that IPO firms with generously compensated CEOs and large pay disparities between the CEO and
other top executives have lower failure rates and longer time to survive in subsequent periods following the
offering. Economically, firms with CEO pay (pay gaps) in the 75th
percentile have a failure risk that is, on
average, 11.56% (13.20%) lower than the failure risk of firms with CEO pay (pay gaps) in the 25th
percentile. The relationship between CEO pay and IPO survival is strengthened among firms with lower
agency conflicts, whereas the link between pay gap and IPO survival is pronounced among firms with
stronger internal promotion incentives. The results are robust to alternative specifications and additional
sensitivity tests.
JEL Classifications: G24; G30; G31; G32; J31; J33; L25
Keywords: Executive Compensation, Pay Gap, IPO Survival, Initial Public Offerings
1
Dimitrios Gounopoulos (corresponding author) is from the University of Bath, E-mail: d.gounopoulos@bath.ac.uk.
Georgios Loukopoulos is from the University of Bath, E-mail: g.loukopoulos@bath.ac.uk.
Panagiotis Loukopoulos is from the University of Strathclyde, E-mail: panagiotis.loukopoulos@strath.ac.uk
We are grateful to Daisy Chou (EFMA discussant), Douglas Cumming, Marc Goergen, Bjorn Jorgensen, Ludovic
Phalippou, David Newton, Markus Schmid, and Silvio Vismara for their helpful comments. We would also like to thank
the seminar participants from Southampton Business School as well as participants from the PhD Conference at the
University of Bath. We also thank the Irish Accounting and Financial Association (IAFA) Conference 2018, Young
Finance Scholars (YFS) Conference 2018, and European Financial Management Association (EFMA) Conference 2018
for their valuable feedback.

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1. Introduction
“Compensation is not the work of a cartel, but it is light years from being an ideal market”
[The Economist, 2016]
The dramatic rise in executive compensation witnessed in public firms over the last decades
has fueled an intense debate on the effectiveness of compensation arrangements. In particular, the
superiority of Chief Executive Officers (CEOs) in the decision making process has raised a
fundamental question: Does the level and composition of compensation contracts elicit the
appropriate effort by senior management, or it is a symptom of agency conflicts at the expense of
shareholders? While a substantial number of studies have examined this question from different
perspectives, the evidence continues to be conflicting (Bebchuk and Fried, 2003; Conyon, 2006;
Gabaix and Landier, 2008; Kaplan, 2008; Murphy, 1999, 2013).
In this longstanding debate, a number of theories have been proposed for the growth of CEO
compensation. One view draws from the “efficient contracting camp” and postulates that the
observed level and composition of compensation is set through an arms-length negotiation, and as
such, it reflects a competitive equilibrium in the market for managerial talent (Murphy and
Zabojnik, 2004, 2010). According to this perspective, compensation levels are simply a reflection of
the demands of a position that requires considerable time, skill, and attention (Kaplan, 2008). In line
with this view, Gabaix and Landier (2008) show that the rise CEO pay is primarily due to increases
in firm size, and interpret this as a natural outcome of an ability-matching mechanism where the
impact of managerial talent is magnified in large firms (Tervio, 2008).
On the other side of the spectrum lies the “managerial power” camp, i.e., those who firmly
believe that the CEO pay process is not determined by competitive market forces but rather by
captive board members catering to rent-seeking, entrenched CEOs (Bebchuk and Fried, 2004;
Kuhnen and Zwiebel, 2009). To support this perspective, they cite as evidence the large and
growing disparity between pay granted to CEO and the compensation of the average worker (Hayes
and Schaefer, 2009), and more often than not, the widening pay gap among the members inside the
boardroom (Kale et al., 2009). Further, numerous studies demonstrate that CEO compensation is
related to a series of unfavorable corporate outcomes, such as excess risk (e.g., Haß et al., 2015;
Kini and Williams, 2012).2
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In addition to the conflicting empirical evidence, several researchers emphasize that neither camp offers convincing
explanations for the well-documented CEO pay patterns. With respect to the contracting view, Frydman and Jenter
(2010) and Nagel (2010) note that the correlation between size and compensation is sensitive to sample selection and
depends on very strong parameter assumptions. As for the managerial power view, the continuous corporate governance
reforms over the last decades (Holmstrom and Kaplan, 2001) cannot be easily reconciled with the story of increased
CEO pay due to weak corporate governance mechanisms (Kaplan, 2008).

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In this study, we endeavor to inform this debate by studying the implications of CEO pay on
the survival of firms undergoing Initial Public Offerings (IPOs). A vibrant IPO market is vital for
the development of privately-held, entrepreneurial firms. As such, the survival of IPO stocks
constitutes an appropriate performance measure, as it determines the length of time for young,
entrepreneurial firms continue to have access to external capital, and hence the ability to remain
innovative and competitive in the public arena (Audretsch and Lehmann 2005; Caves, 1998). On
the other hand, the prosperity of IPO issuers is also crucial for stimulating aggregate economic
growth and job creation (e.g., Doidge et al., 2013). Hence, the survival of newly public firms may
further serve as a measure of capital market development, as the mortality of IPOs may lead to
substantial economic and welfare costs (Fama and French, 2004; Bhattacharya et al., 2015;
Catteneo, et al., 2015).
Yet, despite the growing awareness of the importance of IPOs among both academics and
the investor community, most of the theoretical and empirical work on the performance
consequences of corporate pay packages has predominantly focused on mature publicly-traded
firms, giving far less attention to newly-listed firms. This is particularly important, since the extent
to which compensation practices developed in well-established organizations are fully suitable for
the “entrepreneurial nature” of the IPO process is still open to discussion among academics and
practitioners (see Filatotchev and Allcock, 2013). In this respect, IPOs represent a fertile setting for
enhancing our understanding about the implications of executive compensation packages.
Importantly, given that the likelihood of survival reflects the long-term net effect of corporate
decisions on both risk and return, studying the role of executive pay on the mortality of IPO stocks
might enable us to gain a clearer understanding on whether the pay-setting process is driven by
shareholder value or rent extraction considerations.
The main purpose of our identification strategy is to assess whether the survival of an IPO
can be predicted at the IPO date. To do so, we rely on a sample of 1,178 IPO firms that went public
from 2000 to 2012 and track them until 31 December 2017. Then, we utilize their prospectuses and
construct a unique hand-collected data-set that exploits variation in the compensation arrangements
of all executive board members prior to the offering. The advantage of this strategy is that it
considers the pay distribution of the whole management team. This permits us to examine not only
the pay implications about the CEO but also to evaluate the criticisms about the growing disparities
between the compensation of the CEO and the next layer of executive officers.
Building on this idea, our investigation is guided by two opposing hypotheses. According to
the efficient contracting view, we anticipate that higher CEO pay and large pay disparities alleviate
agency conflicts and hence lead to lower failure rates. In contrast, following the arguments of the

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advocates of the managerial power view, large CEO remuneration or a high pay gap would
represent deviations from optimal contracting schemes, and thus are viewed as contributing factors
to higher failure rates.
We assess the survival profile of IPO issuers by evaluating their survival and hazard
functions. To achieve this, we initially apply the Cox proportional hazard analysis. In line with the
efficient contracting view of compensation, we find that IPO firms with either generously
compensated CEOs or high pay disparities have a lower probability of failure. To get a sense of
economic magnitude, the results imply that, firms with CEO pay (pay gaps) in the 75th
percentile
have a failure risk that is, on average, 11.56% (13.20%) lower than the failure risk of firms with
CEO pay (pay gaps) in the 25th
percentile. In terms of survival time, our accelerated failure time
(AFT) models indicate that, on average, the survival of firms with CEO pay (pay gaps) in the 75th
percentile is increased by 20.23% (28.11%), which translates to an increase of 9.64 (13.39) months
of survival time, compared to firms with CEO pay (pay gaps) in the 25th
percentile. Interestingly,
additional tests on the incentive structure of compensation reveal that our baseline results are driven
by the equity-based components (stock and option award, and other long-term incentive payouts)
rather than the cash-based (salary and bonus) components. This heterogeneous impact is consistent
with the notion that long-term compensation lengthens an executive’s time horizon, rendering its
wealth a function of long-term firm value.
A major challenge in interpreting our results is that the association between our
compensation-based incentive measures and IPO failure rates could be driven by unobservable
factors related to both pay-setting and IPO failure. To alleviate these endogeneity concerns, we
incorporate into our baseline models an array of additional variables that allow us to control for
executive talent, experience, as well the quality of pay-related governance mechanisms.
Furthermore, we employ a two-stage Heckman model and a propensity score approach. Across
these identification strategies, our results are consistent with our baseline inferences.
Further, we examine whether and how the impact of the compensation and tournament
incentives varies in the cross-section. With respect to CEO compensation, we find that the
effectiveness of CEO remuneration packages is pronounced in samples with firms run by CEOs
who are specialists, short-tenured, young, and also founders. Similarly, the impact of CEO pay is
strengthened among firms with low CEO entrenchment and high quality governance mechanisms.
Overall these contingencies suggest that the influence of CEO pay on IPO survival is optimized in
settings that are characterized by low agency conflicts, as predicted by the efficient contracting
camp. Regarding tournament incentives, we find that the negative link between CEO pay and IPO
failure varies in ways predicted by tournament theory, as it is strengthened among firms with higher

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likelihood of promotion, i.e., when the CEO is not a founder, a generalist, long-tenured, and close to
retirement.
Our paper makes contributions to both the literature and current policy debate on the
efficacy of executive pay schemes. To begin, previous literature has explored whether
compensation-based incentives affect either corporate performance (e.g., Bebchuk et al., 2011;
Chen et al., 2013; Kale et al., 2014) or risk taking behavior (e.g., Kini and Williams, 2012; Goel and
Thakor, 2012). These studies focus on various means to an end. We add to this line of inquiry by
focusing on the end itself: the ability of the firm to survive. Further, given the aforementioned
advantages of firm survival over traditional measures of risk and return, our focus on the IPO
aftermarket may offer a sharper test on the drivers and implications of compensation arrangements.
Particularly, since it suggests that, at least in newly listed firms, a meaningful part of executive
compensation is largely driven by a competitive market for talent or intra-firm tournament
incentives rather than weak boards, it adds to the ongoing debate concerned with the effectiveness
of internal incentive structures.
In addition, our work is related with previous studies focusing on the interrelationships
between corporate governance and aftermarket performance of the IPO firm. This line of research
has identified a wide range of governance mechanisms that may reduce the extent of adverse
selection and moral hazard problems, including board characteristics (Cohen and Dean, 2005;
Chemmanur and Paeglis, 2005), the strategic role of founder CEOs (Certo et al., 2001;
Nelson, 2003), and the governance role of early stage investors (Jain and Kini, 2000). To the best of
our knowledge, this study is the first to establish a link between compensation-based managerial
incentives (i.e., CEO compensation and CEO pay gap) and the long-term prospects of newly-public
firms. By doing so, it adds a new dimension to the nascent literature concerned with the influence of
governance factors on the decision of IPO issuers to delist.
Our work is also closely related to a limited number of studies that examine the association
between executive incentives and IPO outcomes. Lowry and Murphy (2007) and Chahine and
Goergen (2011) consider whether IPO options grants relate to underpricing, while Certo et al.
(2003) study the impact of options on IPO valuation. These studies focus on the price discovery
process, and particularly, on the initial reactions of investors with regard to equity-based incentives
at the time of the IPO. Our study differs along two primary dimensions. First, by investigating the
link between compensation-based incentives and firm survival we acknowledge that actual ability
or effort as reflected in the level and structure of compensation arrangements, rather than solely
investor’s perceptions, is also relevant for ensuring the firm’s long-term viability. Second, we
document that not only the CEO performance-based incentives matter for assessing the prospects of

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an IPO, but also the promotion-based incentives of the lower ranked executives. In doing so, we
provide a more complete picture of how the internal incentive structures of young ventures and
entrepreneurial firms can serve as an effective governance tool.
Overall, our findings are relevant to owners and business executives, as they imply that
internal incentive structures at the time of the IPO can help to better assess the survival profile of
the firm, and hence, how long it can raise funding from public markets. At the same time, our study
is of interest to governments, regulators, and policy makers, because it indicates that, to the extent
that the survival of IPOs helps to stimulate and sustain an innovative culture, the effectiveness of
corporate compensation arrangements should also affect the prosperity and growth of the aggregate
economy.
The rest of the study is organized as follows. The subsequent section discusses the
hypothesis development. Section 3 provides an overview of the sample selection procedure and
outlines the survival analysis methodology. Section 4 presents preliminary statistics and the
empirical findings of the impact of total CEO compensation and firm pay disparities on the
probability of failure and time to survive of IPO firms in periods subsequent to the offering.
Sections 5 and 6 provide several robustness and endogeneity tests. Section 7 analyzes the
differential impact of CEO compensation and tournament incentives across several governance and
CEO characteristics. Section 8 concludes the paper.
2. Related Literature and Hypothesis Development
The purpose of this section is to critically analyze what causes the observed trends in
executive pay and to discuss its potential effects in the context of IPO survivability. In doing so, our
discussion is revolved around CEO pay, given that CEOs hold ultimate responsibility for all aspects
of corporate performance (Aggrawal and Samwick, 2003; Bebchuk and Fried, 2004). However,
high CEO pay could also result in large pay disparities within the boardroom. To the extent that
such disparities affect the incentives and behavior of the whole top management team, CEO pay
should not be considered in isolation but rather in conjunction with the remuneration of the other
members of the top management team (Lazear 1989; Landier et al., 2009; Acharya et al., 2011).
With this in mind, we organize our discussion on the implications of CEO compensation as
well as the associated pay disparity on IPO survival based on the two dominant views of executive

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compensation, namely, the efficient contracting view and the managerial power view (Frydman and
Jenter, 2010).3
A. Efficient Contracting View of Performance-Based Compensation Incentives
According to the efficient-contracting view, the observed level and composition of CEO
pay is shaped by an efficient process, which is presumably driven by competitive market forces.
Proponents of the efficient contracting view of compensation advocate that chief executives are
paid the going fair-market rate. In this respect, high compensation levels reflect incentive structures
that aim to retain highly-skilled managers, reward managerial ability and effort, and motivate
managers to optimize firm value. In support of this idea, several prominent studies argue that pay
design is the outcome of a process that reflects a positive assortative matching mechanism, and the
scarcity of CEO talent or CEO effort.
For instance, Gabaix and Landier (2008) develop a theory based on the effect of firm size on
the demand for CEO talent and show that the growth in the aggregate value of the median S&P 500
firm can explain the entire growth in CEO pay from 1980 to 2013. The authors view this size-pay
relation as consistent with the notion that more talented CEOs match with larger firms, where their
value added is greater. Chang et al. (2010) argue that CEO pay reflects differences in ability or at
least, for labor market opportunities, as they show that upon CEO departure, higher CEO’s prior
pay is associated with negative stock price reaction and with higher probability of subsequent labor
market success. Similarly, Falato et al. (2015) proxy for ability or talent using reputation and
educational degrees and find these credentials to be positively related to pay, whereas Engelberg et
al. (2013) show that CEO’s personal connections with high-ranking executive and directors in other
firms is an important driver of pay premium, as such contacts help managers to improve firm value.
Efficient Contracting View of Tournament-Based Compensation Incentives
The literature discussed above has predominantly focused on the CEO but usually does not
take into account the incentives of the executives at the next level down the corporate ladder. In
addition to facing the traditional performance-based incentives (i.e., cash and equity remuneration
schemes), non-CEO executives respond to incentives stemming from the opportunities from
promotion to the higher level of corporate hierarchy – i.e., the CEO position (Green and Stokey,
1983; Baker et al, 1988). Towards this direction, Lazear and Rosen (1981) were the first to
3
Edmans, et al., (2017) and Murphy (2013), propose an additional perspective that shapes executive pay, that is,
institutional forces such as innovations in legislation, disclosure requirements, accounting treatments and tax treatment.
In this study, we focus on the debate between the efficient contracting view and the rent extracting view since this
approach leads to more clear predictions about the performance implications of pay.

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demonstrate analytically that the increase in compensation that a senior executive would obtain
from being CEO serves as a powerful incentive that motivates each executive to outperform its rival
executives in order to increase the likelihood of becoming the firm’s next CEO.
In fact, as the difference between the CEO and the other subordinate executives increases,
the promotion prize becomes larger and the incentive to be promoted to the CEO becomes stronger,
thereby creating intense competition among non-CEO executives (Prendergast, 1999). In such a
tournament scheme, agents have strong incentives to perform well and expend higher effort,
because the best relative performer wins and will receive the tournament price, which includes
higher pay, more privileges and greater prestige (Murphy, 1999). At the same time, this behavior
increases the firm’s output and maximizes shareholder value (Lazear and Rosen 1981; Rosen,
1986).
Rank-order tournaments are schemes of relative performance evaluation that are commonly
used to explain the observed large pay gaps between the CEO and the next-highest executive (e.g.,
Bognanno, 2001). Importantly, they are regarded as optimal labor contracts because the pay
disparities between the CEO and the other senior executives are aimed at a better alignment of the
interests of principals and agents. In this respect, they provide a solution to the agency problems
emanating from monitoring issues, especially in firms where agency costs of managerial discretion
can be hazardous (Henderson and Fredrickson, 2001). An early examination of the pay distribution
within the top management team supporting this idea is provided by Main et al. (1993). More
recently, Lee et al. (2008), Kale et al. (2009), and Chen et al. (2011) focus on the pay differential
between the CEO and senior executives and collectively document that corporate tournament
incentives are positively associated with firm performance.4
Also, it is interesting to note that Burns
et al. (2017) show that the positive association between internal tournament incentives and firm
performance (value) is a cross-country phenomenon.
Taken together, the above theoretical and empirical evidence imply that the presence of a
large CEO pay or pay gap between the CEO and the other senior executives represents an efficient
pay-setting process, which in turn implies lower agency costs, higher productivity, and
consequently the long-term health (viability) of a firm.
4
Masulis and Zhang (2013) provide an additional but consistent with the optimal contracting framework explanation
for the existence of large pay gaps. Particularly, they argue that differences in talent, ability, and effort between the
CEO and the subordinate senior executives may also explain the observed corporate pay disparities. Consistent with this
productivity-based explanation of pay disparities, Chang et al. (2010) find that firms with CEO departures characterized
by high pay disparity experience negative stock price responses around the announcement of the departure. The authors
interpret this finding as consistent with the view that financial markets tend to associate CEO pay disparity with CEO
managerial contribution.

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H1: Efficient Contracting Hypothesis. The level of CEO pay as well as the magnitude of pay gap
between the CEO and the other executives is positively associated with the IPO survival.
B. Managerial Power View of Performance-Based Compensation Incentives
In contrast to the optimal contracting school of thought, the managerial power view asserts
that high CEO pay does not reflect a competitive equilibrium in the market for managerial talent,
neither does it reflect incentives designed to optimize firm value. Instead, this view postulates that
because managers are self-interested, they have their own agenda, and accordingly adds a new
element to the agency problem: the ability of executives to influence both the level and composition
of their own compensation packages, often (if not invariably) at the expense of other executives and
the shareholders (Core et al., 1999; Bertrand and Mullainathan, 2001; Bebchuck et al., 2002;
Bebchuk and Fried, 2003, 2004).
The potential adverse consequences of this rent extraction perspective can be quite
substantial if one considers that the cost to shareholders may be far greater than the direct cost of
excess compensation. As Edmans et al. (2017) note, if market forces permit large deviations from
efficient contracting, pay contracts will be ineffective in providing sufficient motives to exert effort
or refrain from empire building, short termism and manipulation. In such a case, the losses in terms
of firm value can be quite large. This assertion is formally developed in the theoretical framework
of Kuhnen and Zwiebel (2009) where the manager can extract hidden pay, which in turn may either
hinder the shareholders’ ability to assess the manager’s contribution and reduce profits.5
The literature has documented several ways through which CEOs can exercise their power
in order to interfere in compensation arrangements and extract economic rents. Specifically,
managerial rent extraction implies that executive pay will be higher mainly through forms of pay
that are less observable or more difficult to value, such as stock options (Murphy, 2002; Hall and
Murphy, 2003; Aboody et al., 2006; Hayes et al., 2012), perquisities (Jensen and Meckling, 1976;
Jensen, 1986; Bebchuk and Fried, 2004), pensions (Stefanescu et al., 2018), and severance pay
(Yermack, 2006; Goldman and Huang, 2014). Consequently, even if the level of compensation is
not excessive; it is arguably more difficult to justify the widespread use of stealth compensation as
an efficient outcome of an optimal contract.6
5
What is perhaps more interesting in this model, is that rent extraction through executive pay can survive even in
equilibrium, because firing is costly and any CEO replacement is also expected to extract rents.
6
Additionally, the rent extraction view predicts that executive pay will be less sensitive to performance and this
phenomenon is most prevalent when corporate governance is weak (Yermack, 1996; Fahlenbrach, 2009). This is
particularly important in the managerial labor market because poorly governed firms (and hence higher compensation)

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Managerial Power View of Tournament-Based Compensation Incentives
Apart from the inefficiently high levels of compensations, it is important to understand why
a large pay gap between the CEO and the other executives might not serve the interests of the
shareholders. Several researchers predict analytically and empirically that while agents respond to
tournament incentives by putting forth greater effort, this behavior may lead to dysfunctional
responses (e.g., Baker, 1992; Holmstrom and Milgrom, 1991; Jacob and Levitt, 2003). The specific
negative consequences of employing a tournament may range from cheating (see Berentsen and
Lengwiler, 2004) and manipulating or misreporting performance (Park, 2017;Armstrong et al.,
2013) to sabotage of other competitors (Lazear, 1989). As Bainbridge (2004) argue, as the
executive pay widens, executives are more likely to resort unethical behavior to win the tournament
prize.
Existing literature also suggests that stronger tournament incentives are associated with
higher propensity to engage in fraudulent activities (Wang and Winton, 2002; Haß et al., 2015) and
greater likelihood if securities action lawsuits (Shi et al., 2015) as well as greater risk-taking (e.g.,
Goel and Thakor, 2012; Kini and Williams, 2012) in order to increase the likelihood of winning the
tournament (i.e., getting the promotion). However, such actions alter the firm’s risk profile, and
eventually can be detrimental to a firm if executives take excessive risks. This is evident by
Bebchuk et al. (2011), who find that larger tournament prizes (i.e., higher pay gaps) are associated
with lower performance and Chen et al. (2013) who show that pay disparity is positively associated
with the implied cost of equity.
Collectively, the managerial power view postulates that large CEO pay reflects excessive
compensation and an insufficient link between CEO awards and performance, whereas large
disparities may also promote greater risk-taking at the expense of the shareholders.
H2: Managerial Power Hypothesis. The level of CEO pay as well as the magnitude of pay gap
between the CEO and the other senior executives is positively associated with the IPO failure risk.
3. Sample Selection and Methodology
Our sample selection starts with retrieving all the initial public offerings (IPOs) between
2000 and 2012 from Thomson One Banker database. Following the common filtering criteria in the
IPO literature, we eliminate financial institutions, American Depository Receipts (ADRs), closed-
end funds, unit offers, and any other non-common stock type of shares. In addition, we eliminate
impose a negative externality on better governed firms, inducing inefficiently higher levels of compensation in all firms
(Acharya and Volpin, 2010; Dicks, 2012).

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any IPOs with offer price below $5. We obtain IPO background and issuance information from the
SDC, including the issue data, offer price, total proceeds raised, whether the firm is backed by
venture capital and the prestige of underwriters. For underwriter prestige ranking, the study
employs Loughran and Ritter’s (2004) measures of underwriter quality. Accounting data are
retrieved from the Compustat database, and public trading prices are from the Center for Research
and Security Prices (CRSP).
Data regarding the executive compensation (e.g. salary, bonus, restricted stock, options,
non-equity incentive plans, and total compensation) of the CEOs of IPOs are carefully hand
collected from firm prospectuses (S-1) on Securities and Exchange Commission (SEC)’s EDGAR.
Also, we use the IPO prospectuses to construct the biographical profiles of CEOs (e.g., CEO
duality, tenure) and the BoardEx database for information about their work experience. After
merging the data from the above databases and eliminating observation with missing values, our
final sample consists of 1,178 IPO firms.
Since our survival window is five years, we track these IPO issuers until 31 December 2017
to determine whether they were delisted or not.7
CRSP provides delisting codes to indicate the
status of the issuing firm, specifically, whether the firm is still trading and specific reasons for
delisting, such as failure to meet listing standards, corporate governance violation, liquidation,
insufficient capital, bankruptcy, etc. Based on the CRSP delisting codes, we distinguish the IPO
firms into five groups based on their 3-digit CRSP delisting code: acquired (200-290), exchanged
(300-390), liquidated (400-490), dropped (500-591) and survived. Following prior literature (Jain
and Kini, 2000; Gounopoulos and Pham, 2018) survived firms are defined as firms that continue to
operate independently as public corporations and appeared on the CRSP tape from the IPO date to
at least five years after the offering. Our sample of 1,178 IPOs is comprised of 814 survived firms,
274 acquired firms, 82 dropped firms, 6 exchanged firms and 2 liquidated firms.8
4. Survival Analysis Methodology
4.1.1 Cox Proportional Hazard Model
To assess our hypotheses, and specifically, whether the survival profile of our IPO firms is a
function of executive compensation incentives we apply both nonparametric and semi-parametric
approaches. To this end, we employ survival analysis in order to obtain non-parametric estimates of
survival and hazard probabilities Survival analysis is a statistical technique for analyzing the
7
For example, a firm that went public in 2000 is tracked for 17 years compare to 5 years for a firm that went public in
2012.
8
Our sample has no firms whose delisting codes are 600-900.

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expected duration of time until one or more events happen (such as the death of a public firm) and
has been used extensively in prior research to examine determinants of IPO survival (e.g., Keasey et
al., 1990; Hensler et al., 1997; Jain and Kini, 2000; Carpentier and Suret, 2011; Alhadab et al.,
2014).
Its primary benefit over ordinary least squares (OLS) and the binary dependent variable
model is that it allows us to take into account the length of time that a company survives.
Additionally, it is particularly useful to censored data, i.e., events (delisting of IPOs) that have
either different time horizons or have not yet occurred. In our study, the survival time of IPO firms
is right censored because many firms that went public are still trading. Also, the time window is
different for each firm depending on the IPO date. For instance, a firm that went public in 2000 is
tracked for 17 years compared to 5 years for a firm that went public in 2000.
Technically, the hazard function is the conditional failure rate given that the firm has
survived up to the specified time. If well compensated CEOs can reduce the failure risk, the hazard
function for IPO firms with a high compensated CEO will remain below that of firms with a low
compensated CEO. We estimate the hazard functions for the two groups of IPO firms using the
Nelson-Aalen estimator, which is defined as:
̂( ) ∑ (1)
where is the number of failed firms at time and is the number of firms at risk at time .
The survival function provides the probability that the firm survives up to a particular time.
If high compensated CEOs can enhance the survivability of issuing firms, the survival function
curve of firms with a high compensated CEO will be above that of firms with a low compensated
CEO. We estimate the survival rates of the two groups of IPO firms using the Kaplan-Meier
estimator which is a non-parametric maximum likelihood method and is defined as:
̂( ) ∏ (2)
where ̂( ) is the probability of being listed at time , is the number of failed firms at time and
is the number of firms at risks at time . In addition, we use the log-rank test for testing the
statistical differences between the estimated survival curves of IPO firms with a high compensated
CEO and those with a low compensated CEO.

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Then, we employ the Cox proportional hazard model. The advantage of this model over
other hazards models is that the baseline hazard function follows the firm over a specified time
period and focus at which point in time it experiences an event of interest (see for example, Allison,
2000). We estimate the following model:
( ) ( ) (3)
where ( ) is the baseline hazard function, and is the time to failure (i.e., the duration to the
delisting date). The dependent variable is a dichotomy variable that indicates the failure risk (i.e.,
whether the firm delists within 5 years after the IPO); thus, a negative (positive) coefficient that an
increase in the managerial incentives leads to a decrease (increase) in the probability of delisting in
the subsequent periods. The hazard ratio for each independent variable is computed as the
exponentiated coefficient for the variable. It measures the increase in failure risk for a unit increase
in the value of the independent variable. If the hazard ratio is above one, then an increase in the
covariate increases the failure rate, while a hazard ratio of less than one indicates than an increase in
the covariate decreases the failure rate.9
The compensation-based incentives variables are total CEO compensation and firm pay gap.
We define the total CEO compensation as the natural logarithm of the sum of salary, bonus, stock
and option awards, non-equity incentives, and other long-term incentive pay-outs. Also, we measure
the strength of tournament incentives (pay disparity) as the natural logarithm of the difference
between CEO’s total compensation and the median of the other senior executives (Kale et al.,
2009).10 11
4.1.2 Accelerated Failure Time (AFT)
For robustness check and comparative purposes, we also use another survival model, the
Accelerated Failure Time (AFT), to examine the determinants of the survival rates. In contrast with
Cox (1972) model, the AFT method allows the impact of the independent variables on survival time
to vary over the post-IPO period depending on the length of time since listing (Hensler et al., 1997;
9
In our case, we use continues variables, thus, the estimated change in the hazard rate for a unit increase in the
independent variable is 100*(hazard ratio-1) (Allison, 2000; Jain and Martin, 2005; Alhadab et al., 2014).
10
We use the top three executives including the CEO rather than the four top executives that is common in the literature
because the average number per year of non-CEO executives in our sample period is close to three. However, our
results are robust if we use the top four executives for the median estimation whenever possible.
11
When the compensation gap is negative, we monotonically transform all observations by adding a constant equal to
the absolute value of the minimum gap. However, our results remain the same if we do not apply this transformation.

14
Jain and Kini, 2000). The AFT model is typically expressed in terms of log-linear function with
respect to survival time (e.g., Hensler et al., 1997; Bradburn et al., 2003):
( ) (4)
where , …., are parameters to be estimated, , …., are covariates, and is the error term
with a specific distributional form which determines the regression model. We estimate the
following specific model where the natural logarithm of the time to delist (survival time) is
presented as a linear function of the covariates12
:
( ) (5)
where ( ) is the natural logarithm of the survival time or time to failure (measured in months).
In this model, the exponential of the coefficient is an ‘acceleration factor’ also known as the time
ratio. Time ratio measures the extent to which changes in the independent variables speed up or
slow down the occurrence of delisting. A positive coefficient implies a time ratio above one,
indicating that an increase in the covariate increases survival time, while a negative coefficient (a
time ratio below one) shows that an increase in the covariate decreases survival time (Bradburn et
al., 2003; Espenlaub et al., 2012).
4.2 Control Variables
We control for various firm, CEO and offering characteristics that are suggested by prior
literature as determinants of IPO survival. Nelson (2003) finds that a CEO who also is the founder
of the firm at the time of IPO increases firm’s valuation. Accordingly, Adams et al. (2005)
document that CEOs who are not the chairman of the board have less influence over board
decisions and the firm is less likely to survive. In line with these studies, Gounopoulos and Pham
(2018) suggest that IPO firms with CEO-Chairman (CEO Duality), CEO-Founder and CEOs with
high tenure survive longer in the following years. Thus, we include CEO duality, tenure and CEO-
Founder to account for these CEO characteristics.
Also, we include proceeds and initial returns to account for the positive effects of firm size
and underpricing on IPO survival as documented by Schultz (1993) and Hensler et al. (1997).
12
AFT models being the parametric models require specific underlying distribution (i.e., Weibull, Gama, lognormal
etc.). Unreported results for Akaike’s Information Criterion (AIC) identify Weibull as the most appropriate distribution
with the lowest AIC value.

15
Schultz (1993) finds a positive relation between reputable underwriters and IPO survival, while Jain
and Kini (2000) indicate that the involvement of venture capitalists (VCs) in the IPO process
improves the survival profiles of IPO firms. Another strand of literature (e.g., Jain and Martin,
2005; Bhattacharya et al., 2015) document that IPO firms audited by high-quality accounting firms
survive longer in the following years. Furthermore, Certo et al. (2001) support the opinion that the
presence of venture capital seen to affect outcomes in IPO studies. To capture the impact of these
financial intermediaries on IPO survival, we include the following indicator variables: underwriter,
VC, and Big 4 Auditor. Additionally, we add financial leverage to control for the firm’s borrowing
capacity based on the finding of Demers and Joos (2007) that the leverage ratio of IPO firms is
positively related to the probability of failure.
With respect to investment policies, Jain and Kini (2008) suggest that the probability of IPO
survival is positively associated with R&D expenditures, whereas Demers and Joos (2007)
document that R&D expenses is expected to provide an indication of the firm’s riskiness. Following
these studies, we control for the impact of strategic investment on IPO survival by including the
intensity of R&D and capital expenditures. In addition, Gounopoulos and Pham (2018) find a
positive association between survivorship and profitability, hence, we account for the effect of firm
performance by including the earnings per share (EPS). We consider measures of market conditions
in the IPO market (market return) as well as industry conditions (industry concentration) and board
governance quality. Lastly, we control for the presence of Internet, Technology firms, and firms
incorporated in Nasdaq.
5. Empirical Results
This section reports the results of our analysis on IPO survival. Firstly, we present summary
statistics along with graphical evidence using the Nelson-Aalen and Kaplan-Meier methods to
estimate the hazard and survival functions. Next, we focus on the duration analysis results using the
Cox proportional hazard model as well as the Accelerate Failure Time (AFT) approach.
5.1 Descriptive Statistics
Table 1 utilizes the trading status of our sample firms and categorizes them into five groups:
dropped, acquired, exchanged, liquidated, and survived firms. Then, it presents how the
distributional variability of these sub-samples varies by year and by industry. Panel A shows that
tracking for five years after the issue date, 69.10% of the firms survived, 23.26% acquired, 6.96%
failed, 0.51% exchanged and 0.17% liquidated. Finally, we find that approximately 30% of IPOs
either dropped or are acquired within five years after the offering.

16
Panel B repeats the same exercise by year. The number of IPOs tends to decline after
economic crises, as indicated by the Dot-com bubble and the Credit Crunch in 2000 and 2007,
respectively. The percentage of firms being dropped is highest for firms going public in 2000
(12.12%) and 2008 (11.76%). This is consistent with the economic crises in those years, which had
an adverse impact on the IPO firms’ survivability. The percentage of firms being acquired is highest
in 2012 (34%) and lowest in 2008 (6%). Further, the proportion of exchanged and liquidated firms
is less than 1% in the most cases, except from 2008 where it were approximately equal to 6%.
Generally, more than half of the firms survive for at least five years after the IPO. The highest
proportion of survived firms is found in 2005 (76%) while the lowest proportion of survived firms
is in 2012 (62%).
Panel C classifies IPO firms in sectors and reveals a relatively high concentration of IPOs in
the computer equipment and services as well as in the chemical products sectors. The industry with
the highest percentage of acquired IPOs is scientific instruments (26.67%) followed by electronic
equipment (26.23%). Furthermore, entertainment services (13.33%) and manufacturing (9.38%) are
the industries with the highest percentage of dropped firms, while those with the lowest proportion
are food products and wholesale and retail trade. It is worth noting that the percentage of survived
firms in all industries is no less than 57%. Particularly, the proportion of survived firms is highest in
entertainment services (86.67%) and transportation and public utilities (78.57), whereas the lowest
percentage of survived firms is found in the manufacturing (57.29%) and computer and equipment
services (61.57%).
Panel D of Table 1 demonstrates the cumulative survival rates (using the non-parametric
Kaplan-Meier method) of our sample as well as for IPOs with high and low compensated CEOs for
one, three, and five years after IPO. The findings present a substantial degree of variation dependent
on the year of issue with one-year survival rates ranging from 88.23% to 100%. In particular,
survival rates drop from the maximum of 100% recorded in 2001 to 88% in 2008. It is also worth
noting that cumulative survival rates over one, three and five years after IPO are higher for IPO
firms with high remunerated CEOs in most of the years (except for the years 2004, 2008, and 2010).
Panel A of Table 2 compares the values of our compensation variables over the three
samples (overall sample, firms with high and low compensated CEOs). Over the sample period, the
mean total CEO remuneration is $1.297 million which is comparable with the corresponding
descriptive results of Gounopoulos and Pham (2018). The average gap between CEO pay and the
median pay of other executive members is $0.9 million, which is considerably lower than that of
studies focusing on seasoned firms (e.g., Kale et al., 2009; Vo and Canil, 2016). Also, the median
compensation of others executives is around $0.5 million. Regarding the CEO pay components,

17
salary accounts for the largest proportion of total CEO compensation (52%), followed by option
awards (17%) and bonus (16%). Finally, high remunerated CEOs have high pay packages mainly
due to bonuses and option awards.
Panel B of Table 2 describes the average CEO profile for the overall sample and the low and
high compensation sub-samples. On average, a CEO is 50 years old with tenure of approximately 4
years. 30% of CEOs are also founders of the firm and 54% hold a chair position (CEO duality). In
addition, it seems that firms prefer to hire new CEOs with general skills. In line with the
compensation literature, CEOs in the high compensation sub-sample tend to have more experience
or knowledge than otherwise, as documented by their higher age. Furthermore, consistent with the
prior literature (Custodio et al., 2012; Gounopoulos and Pham, 2018) firms are willing to provide
more generous remuneration packages to generalists as well as to CEOs who are also the chairman
of the board. In contrast, the proportion of founder-CEOs is considerably lower than professional
CEOs in the high-compensation regime, which is consistent with the notion that founder-CEOs
have intrinsic motivation, and hence, lower dependence to external incentives.
Panel C presents the firm and offering characteristics for the overall sample and the sub-
samples of firms with high and low remunerated CEO. On average, the IPO firms are relatively
young (15 years) and around half of them are ventured-backed. In addition, 40% of firms are in a
high-tech industry and almost 10% are characterized as internet stocks. Around 35% of the IPOs are
underwritten by top-tier investment banks and 47% are audited by the big four. Moreover, the
average IPO first-day returns are 22.22%, while the vast majority of the firms (72%) are
incorporated in Nasdaq.
Panel C of Table 2 suggests a positive pay-performance link between accounting-based
profitability (EPS) and remuneration, which is consistent with the well-documented finding that
CEO pay reflects —at least partially— a reward for prior or contemporaneous performance (Coles
et al., 2006). It also confirms the idea, that larger and older firms provide more generous
remuneration packages than small firms (e.g., Conyon, 2006; Gabaix et al., 2008). It is also worth
mentioning that these firms are able to attract more reputable investment banks (underwriters), but
have less backing by venture capitalists. Regarding the initial returns, it seems that the market
perceives high compensation CEOs as better skilled and more capable than low compensated CEOs,
as the former are associated with lower underpricing.
In Panel D (Table 2), we present a list of ten IPO issuers along with the CEO compensation
and their trading status in the high and low compensation sub-samples, respectively. This list is
provided only for illustrative purposes; nonetheless, it is suggestive that higher CEO compensation
is related with greater chances of IPO survivability. Finally, it should be noted that we obtained

18
similar results when we repeated the above analysis in sub-samples based on the median of pay gap
as a cut off. For brevity, we do not report this analysis, but it is available upon request.
5.2 Plots of Hazard and Survival Functions
To investigate more thoroughly whether executive remuneration can be regarded as a
predictor of IPO survival, in this section, we estimate the hazard and survival functions for both
firms with high compensated (high firm gaps) CEOs and with low compensated (low firm gaps)
CEOs. The plots of Nelson-Aalen cumulative hazard and Kaplan-Meier survival estimates are
provided in Figure 1 and Figure 2, respectively. In Figures 1a and 2a, the hazard function of IPO
firms with a high compensated CEO (large pay disparity) are below than that of firms with a low
compensated CEO (low pay disparity), respectively. The gaps widen slightly but steadily as the
length of time following the issue year increases. On the other hand, as it can be seen from Figures
1b and 2b, the survival functions of IPO firms with high compensated CEO (large pay disparity) are
consistently above that of firms with a low compensated CEO (low pay disparity). Also, the gap
between the survival functions for both total compensation and firm gap widens after 2005.
In detail, the probability of surviving 5 years after the issue is around 83% (79%) for firms
with a high compensated CEO (high firm gap), compared to 71% (52%) for firms with a low
compensated CEO (low firm gap). The survival probability after 10 years following the issue
decreases considerably for firms with low pay gap (low compensated CEO) 47% (45%), while this
probability is 59% (62%) for firms with high pay gap (high compensated CEO). Furthermore, the
log-rank test for equality of survival functions shows that the estimated survival curves of the four
groups are different at the 1% significance level. Overall, the plots of survival and hazard functions
document that IPO firms with a high compensated CEO (large pay gap) have a more attractive
survival profile compared to firms with low compensated CEOs (low pay gaps).
5.3 Estimation of the Cox Proportional Hazards Model on Total CEO Compensation
Table 4 assesses the impact of total CEO compensation on the probability of IPO survival
using Cox proportional hazards model after controlling for various firm and CEO attributes that
may influence the IPO long-term prospects. Specification (1) documents a strong and significant
negative coefficient on total CEO compensation, suggesting that IPO firms with better remunerated
CEOs have a lower probability of failure. This finding supports the efficient contracting hypothesis
that IPO firms with a high compensated CEO have better chances of survival than IPOs with a low
compensated CEO. The economic effect is significant: the magnitude of the coefficient estimate

19
suggests that firms with CEO pay in the 75th
percentile have a failure risk that is, on average,
11.56% lower than the failure risk of firms with CEO pay in the 25th
percentile.13
In specifications (2) and (3) we examine the possibility that the coefficient of the total CEO
compensation masks information embedded in the individual remuneration components. As
expected, the decomposition of total compensation into its cash and equity components reveals that
the link between compensation and IPO mortality is driven by the long-term portion of
remuneration. Consequently, the results based on both the level and structure of CEO compensation
support the efficient contracting hypothesis.
As for the results about the remaining control variables, their sign and significance is
generally consistent with prior literature in all specifications. In particular, we find that firms with
CEOs who also serve as chairman tend to have a lower probability of failure, which is in line with
the study of Adams et al. (2005). By contrast, managers who have been serving as CEOs for many
years (CEO tenure) have a higher probability of failure. Additionally, firms with higher IPO first-
day returns tend to have higher failure risks in subsequent periods. In contrast to the findings of Jain
and Kini (2000), our results suggest than venture-backing is not significantly associated to IPO
mortality.
Moreover, we do not find a significant relation between IPO survival and profitability. The
results regarding proceeds and its impact on IPO survival contradict with the prior literature (e.g.,
Espenlaub et al., 2012), as there is not a statistically significant association with survivorship. With
respect to underwriters and big auditors, our results suggest that only top-underwriters are
important, consistent with the prior literature (Bhattacharya et al., 2015; Espenlaub et al., 2016).
Also, we find that well-governed firms as well as firms operating in a low competitive environment
have lower failure risks in periods following the offering. With respect to the investment variables,
capex increases the survival rates, whereas R&D is increases the failure rates (Demers and Joos,
2007); however, only the latter seems is significant.
5.4 Estimation of the Cox Proportional Hazards Model on Total Firm Pay Disparity
Next, we continue our analysis by replacing the total CEO compensation with the firm pay
gap. Specification (1) of Table 5 indicates that, the coefficient on total firm pay gap is negative and
significant at the 5% level. In economic terms, the magnitude of the coefficient estimate suggests
that firms with pay gaps in the 75th
percentile have a failure risk that is, on average, 13.20% lower
13
This estimate represents the change in the hazard rate for a firm that moves from the 25th
percentile to the
75th
percentile of the distribution of the natural logarithm of total CEO compensation (13.99-12.76) and is calculated as
follows: exp(-0.10 x 1.23) -1 = -11.56%.

20
than the failure risk of firms with pay gaps in the 25th
percentile.14
Specifications (2) and (3) of
Table 5 provide further insights by examining the impact of short-term and long-term firm pay
disparities on IPO survival. The estimated coefficients on short-term and long-term pay gap produce
different results. In particular, the coefficient on short-term pay gap is positive and insignificant,
while the coefficient on long-term pay gap is negative and significant at 1% level. This suggests
that, as in the case of total compensation, IPO firms with large pay disparities face a lower
probability of failure than those with low pay disparities, and this relationship is largely driven by
the long-term component of pay gap.
With respect to the coefficients and the significance of the remaining covariates, the results
are comparable to those of the previous sub-section across all specification. As a consequence, the
evidence in this section corroborate the efficient contracting hypothesis of executive compensation,
and particularly the tournament view of pay disparities, given that firms with high pay disparities
are more likely to survive after the IPO than firms with low pay disparities among top executives.15
5.5 Accelerated Failure Time (AFT) Method
The results thus far show that high CEO remuneration and firm tournament incentives
enhance IPO survivability. In this section, we further test this hypothesis, by estimating an AFT
model of IPO time-to-failure. Under this approach, the dependent variable is the natural logarithm
of the survival time or time to failure. Therefore, a positive (negative) coefficient in the independent
variable of interest implies a longer (shorter) period to survive.
In Table 6 we present both the coefficient estimates and the time ratios along with the
associated p-values. The results indicate a positive association between total CEO compensation
and survival time. The coefficient on total remuneration is positive and significant at the 1% level.
On average, the survival time of firms with CEO pay in the 75th
percentile increases by 20.23%,
which translates to an increase of 9.64 months of survival time, compared to firms with CEO pay in
the 25th
percentile. Similarly, the coefficient on the firm pay disparity is positive and significant at
the 5% level. Specifically, the survival time of firms with pay gaps in the 75th
percentile is increased
14
The change in the hazard rate for a firm that moves in the interquartile range of the distribution of the natural
logarithm of pay gap (13.55-11.78) is calculated as follows: exp(-0.08 x 1.77) -1 = -13.20%.
15
In additional robustness checks we repeated all of our baseline regressions after clustering the standard errors by
either industry or year. We find that both of these choices increase the statistical significance of our variables of interest.

21
by 28.11%, which translates to an increase of 13.39 months of survival time, compared to firms
with pay gaps in the 25th
percentile.16
The results regarding the control variables and their impact on time-to-failure are similar
and opposite in sign to those in the Cox models. Starting from the managerial power proxies, it is
evident that firms run by a CEO who is also a chairman are more likely to survive longer, whereas
the coefficient on CEO tenure is negative and significant. In addition founder-CEOs are positively
but insignificantly related with time to failure.
The coefficient on immediate aftermarket returns is negative (as expected) and statistically
significant. The positive association between underwriter and IPO survival is consistent with
Bhattacharya et al. (2015), who find that IPOs which attract top-tier investment banks have
significantly increased survival times. Contrary to Jain and Kini (2000), we find an insignificant
effect of venture capitalists and Big 4 auditors on survival. Our results also provide support to the
argument that a firm with high board governance quality and industry concentration has much
higher survival time compared to others (Chancharat et al., 2012). Lastly, our findings document
that undertaking risky investment activities (R&D) significantly decreases the survival time of the
issuing firms.
6. Robustness Tests
In this section, we examine the robustness of our results in various ways. We begin by
adopting alternative definitions of the dependent variable (i.e., survivors or non survivors) and then
alternative definitions for the tournament incentives variable.
6.1 Re-classification of M&A Stock Delisting
In the analysis so far, we classified M&As as genuine delistings (non-survivors), thus
treating M&A delistings in the same way as delistings due to other negative reasons. However, not
all M&A-related delistings are necessarily bad news to investors of target companies. Zingales
(1995) shows that the IPO may be the first step in a gradual sale of the company. On the contrary,
Fama and French (2004) note that managers who enjoy private benefits may be reluctant to cede
control unless forced to do so because of financial distress, arguments suggesting that low-quality
16
The first estimate represents the change in the time ratio for a firm that moves from the 25th
percentile t the
75th
percentile of the distribution of the natural logarithm of total compensation and is calculated as follows: exp(0.15 x
1.23) -1 = 20.23%. Similarly, the change in the time ratio for a firm that moves in the interquartile range of the
distribution of the natural of pay gap is calculated as follows: exp(0.14 x 1.77) -1 = 28.11%. This translates into 9.64
months for CEO pay (i.e., 20.23% x 47.64 months for survival time in the 25th
percentile) and 13.39 months for CEO
pay gap (i.e., 28.11% x 47.64 months for survival time in the 25th
percentile).

22
IPO firms are more likely to be acquired. Given this ambiguity, we examine the robustness of our
results by treating some delistings due to M&A as “censored survivors”, that is, stocks that are still
considered alive at the end of our study period.
To identify the censored survivors, we acknowledge that, due to poor performance or
financial difficulties, some M&A delistings are typically less attractive to target shareholders than
other M&As. Following Espenlaub et al. (2012, 2016), we seek to differentiate such poorly
performing M&A stocks from the remaining by imposing a performance criterion. To do so, we
locate M&A delisting of well-performing companies either in the year prior to the IPO or in the
year prior to the acquisition by ranking companies on the basis of four performance measures: cash
to total assets, total liabilities to total assets, operating income to total assets, current assets to
current liabilities. Companies that rank above (below) the median based on all four indicators are
considered censored survivors (non-survivors or failures).
Our final alternative definition of survival is concerned with the time to delist after the issue
date. Bhattacharrya et al. (2015) show that, in contrast to the common perception that survival risk
decreases as a firm ages, public firms need to survive up to the age of three years after the IPO
before their survival rate starts diminishing. Based on this finding, the authors suggest that the first
three years after a firm goes public are critical to its long-term survival. Following this suggestion,
we re-evaluate the relationship between managerial incentives and IPO survival by identifying
whether each firms continues to be listed three instead of five years after the issue date.
The results of our robustness checks are shown in columns (1) and (2) of Panel A and B
(Table 6) and are qualitatively similar to the baseline findings. Notwithstanding the above evidence,
one might still argue that true failures are considered as cases of firms that involve delisting only for
negative reasons (i.e., liquidated or dropped). Following Jain and Kini (2000) and Gounopoulos and
Pham (2018) we consider all M&A delistings as survivors, and hence, classify as failures only the
companies that were liquidated or dropped. We continue to find that CEO compensation and CEO
pay gap have a significant negative impact on failure risk (column 3 of Panel A and B). Finally,
column (4) of Panel A and B reveals that the relationship between our managerial incentives
measure and IPO failures continues to be negative, albeit weaker both in economic and statistical
terms.
6.2 Alternative Measures of Tournament Incentives
Thus far, we have used the CEO pay-gap measure of Kale et al. (2009) as our proxy for
tournament incentives, which is calculated as the natural logarithm of the difference between the
CEO’s total compensation and the median value of the compensation of the firm’s other senior

23
executives in a given firm-year. This approach has intuitive appeal as it roughly captures the
increase in a non-CEO executive’s compensation after winning the tournament (i.e., “the typical
size of the prize”). Nonetheless, we acknowledge that the use of the median executive pay could
overestimate (underestimate) tournament incentive if only one or two executives have significantly
higher (lower) compensation and higher (lower) chances of obtaining promotions than the
remaining top executive members (Masulis and Zhang, 2012). To eliminate this measurement error
in our pay disparity measure, we use the natural logarithm of the difference in pay between the CEO
and the mean of the other members of the top management team.
Another potential concern with our main measure of tournament-based incentives is that it
may be highly correlated with a particular major determinant of CEO compensation firm size, since
pay differential tend to increase with firm size (Gabaix and Landier, 2008). A pay-gap-based
promotion metric is therefore subject to the concern that the link between tournament incentives and
IPO failure is contaminated by firm size. To mitigate such concerns, we disentangle the pay
disparity measure from firm size by using an alternative pay disparity measure: the CEO pay slice
(CPS) – calculated as the fraction of the aggregate compensation of the top 3 executives paid to the
CEO (e.g., Bebchuk et al., 2011).
Our results in Panel C (Table 6) remain unchanged as we continue to find significant results
for the mean gap between the CEO and the next layer of executives (at the 5% level), either in the
Cox or in the AFT models. The results in Panel D reveal that the CEO pay slice decreases the
failure rates and increases the survival time. However, only the influence of survival time is
statistically significant (5% level).
6.3.1 Alternative Industry Definitions
In our baseline tests, we use the Fama-French 17 industry classification scheme to control
for time-invariant unobservable industry characteristics that may be driving the association between
compensation-based incentives and IPO survival. To examine the robustness of our main results we
use alternative industry definitions, and specifically, the Fama-French 30 and Fama-French 49 or
exclude the industry fixed effects. In Table 7, we compare the results and obtain negative and
similar coefficients for CEO compensation and pay-gap, which implies that our reported results are
not materially affected by industry membership.
6.4 Correction for Endogeneity and Sample Selection Bias
In studying the relation between managerial incentives and IPO failure, it is critical to
recognize the possibility that our managerial incentives variables are determined endogenously, as

24
they could be determined by factors that are also related to firm survival (e.g., Coles et al., 2006;
Kale et al., 2009; Kini and Williams, 2012).
In the main tests we tried to account for this in several different ways when relating
executive compensation with the delisting decision in subsequent periods. Initially, we used lagged
values (that is, in the fiscal-year prior to the IPO) instead of contemporaneous values (i.e., at the
IPO fiscal-year) of CEO compensation and pay disparities, in order to make the analysis less
vulnerable to simultaneity issues. In addition, we used an extensive set of control variables, and
added fixed effects which capture time-series (year) and cross-sectional (industry) dynamics
between managerial incentives and IPO survival, in order to mitigate the unobserved heterogeneity
problems. To ensure the robustness of our results, we conduct three additional tests: (1) we account
for potentially correlated omitted variables, (2) the two-stage Heckman procedure, and (3) a
propensity score matching procedure.
6.4.1 Omitted Variable Bias
Our measures of executive compensation incentives, the CEO remuneration and the CEO
pay gap, are likely be related to CEO attributes which themselves might be related to IPO failure
risk. Hence, a major concern is that our baseline results might be driven by omitted CEO-related
variables that affect both compensation-based incentives and IPO survival. To address this concern,
we add to our baseline Cox model (Equation (3)) an array of variables associated with CEO risk
aversion, experience, power, talent, and ability. Specifically, we incorporate into our model the:
CEO gender (Faccio et al., 2016), CEO age (Serfling, 2014), CEO power (Adams et al., 2005; Yim,
2013), and educational attainments (whether the CEO has an MBA, PhD, JD or MD).
In addition, it is possible that our measures of managerial incentives will be related to
corporate governance mechanism which may influence the pay-setting process and lead to a higher
or lower failure rates (e.g., Bebchuk et al., 2011). Although, we already control for overall
governance quality in the baseline models, we also consider the quality of the compensation
committee as an additional control (Compensation Committee Quality), given that it is the most
relevant governance mechanism to the design of compensation-based incentives.
As shown in Table 8, results continue to support the efficient contracting hypothesis.
Specifically, we observe negative and significant coefficients on our variables of interest (CEO pay
and CEO pay gap) suggesting that the additional CEO-related and governance variables do not
dampen the effect of CEO compensation and tournament incentives on IPO survival.

25
6.4.2 Two-stage Heckman Process
To further address the issue of endogeneity and self-selection bias associated with our
managerial incentive variables, we estimate a two-stage Heckman-style model (e.g., Espenlaub,
2016). In the first-stage, we estimate two Probit models: one modelling for the likelihood of a given
IPO having a highly compensated CEO, and a second Probit model of the likelihood of having large
disparity in the pay distribution of the top management team. In the second stage of our selection
model, the Inverse Mills Ratios (IMR) from each Probit model is included as additional variable in
our baseline Cox model. The results of the second-stage of the selection model are reported in Panel
B of Table 9. They show that sample selection bias is not a concern in our baseline analysis, as
neither of the two Inverse Mills Ratios is statistically significant at conventional levels.
6.4.3 Propensity Score Matching Procedure
As a final check, we acknowledge that a CEO may be selected due to the fit between the
individual’s preferences and job requirements. For instance, a well-performing firm might have
better chances in attracting experienced and talented CEOs. Alternatively, a conservative (risk-
averse) CEO might prefer to work in a low-growth firm (Hoitash et al., 2016). In these cases, our
results may be subject to sample selection bias. Following Gounopoulos and Pham (2018), we
address the endogenous matching between CEOs and firms by employing a propensity score
matching procedure. This approach permits us to compare the occurrence of delisting within five
years after the IPO between a firm with high managerial incentives (i.e., with high compensated
CEO or large pay disparities) with the occurrence of delisting of the same firm if it had low
managerial incentives.
To do so, we calculate the propensity score, i.e., the conditional probability receiving the
treatment (having a high compensated CEO or large pay disparities) given a firm’s and CEO’s pre-
treatment characteristics, for all the IPOs by estimating a probit model which accounts for the
following variables: Founder, CEO Age, Triality, Generalist, Leverage, Proceeds, Internet,
Compensation Quality Committee, Board Independence, R&D Intensity, Capital Intensity, and year
dummies. Based on the resulting propensity score we match each observation of the treated group
with an observation of the control group and estimate the average treatment effect on the treated
(ATET) in order to assess the influence of high managerial incentives on the delisting probability.
Table 10 presents the results for the ATET on the decision to delist for IPO firms with high
managerial incentives versus those with low managerial incentives. The ATET is negative and
significant at the 1% for CEO compensation, whereas it is also negative and significant at the 10%

26
level for the CEO pay gap. Hence, these finding are consistent with the results presented in the main
analysis.17
6.5 The Effect of Managerial Incentives on Post-IPO Performance
The results so far univocally support the positive impact of managerial incentives on post-
IPO survival. The probability of survival is a sophisticated measure for IPOs, as it specifically
addresses the issues related to newly listed companies. In addition to that, we assess the evaluation
made by external investors (i.e., the market) by calculating the buy-and-hold (BHAR) returns
adjusted for market value weighted returns as well the post-IPO return volatility for the three years
subsequent to the IPO or until the year before delisting for failed firms.
In Panel A of Table 11 we report the mean of the stock performance for the managerial
incentives subsamples using as a cut off the median of total CEO compensation and CEO pay gap,
respectively. The univariate results indicate that over the 36 month period after the IPO, the
performance differential across the subsamples becomes larger. Additionally, the mean differences
are significant for both compensation-based measures, except for the 12-month BHAR in the pay
disparity subsamples. In Panel B and C we examine whether the managerial incentive measures
affect stock performance in a multivariate setting. The results reveal a similar picture, albeit
statistically weaker.
Similarly, in Panel A of Table 12 we report the mean of post-IPO volatility for the
managerial incentives subsamples using as a cut off the median of total CEO compensation and
CEO pay gap, respectively. The univariate results indicate that over the 36 month period after the
IPO, the risk differentials across the subsamples become larger and are consistently statistically
significant. In Panel B and C we examine whether the managerial incentive measures affect stock
volatility in a multivariate setting. The regression results indicate that the negative association
between the pay measures and post-IPO volatility is significant only within 6 months after the IPO.
Overall, the positive linkage between our incentives measures and stock returns is consistent
with the notion that former reflect scarcity of talent of greater effort, which is in line with Kale et al.
(2009). In contrast, their negative association with return volatility does not support the idea that
greater performance is achieved by undertaking riskier activities (e.g., Kini and Williams, 2012).
Nonetheless, these results corroborate our main findings that greater CEO compensation incentives,
either in absolute or relative form, are associated with greater chances of IPO survival.
17
In untabulated results, we reach to similar conclusions when the dependent variable is survival time instead of failure
risk

27
7. Cross Sectional Variation in Compensation and Tournament Incentives
In this section, we explore cross-sectional variations in the importance of CEO
compensation and firm pay disparities on IPO survivability along different dimensions of corporate
governance and CEO characteristics. An important benefit of this analysis is that it can depict a
more nuanced picture of the effect of these managerial incentives by highlighting settings in which
their effectiveness is pronounced or weakened.
7.1 Governance and Monitoring Mechanisms and Compensations Incentives
Chahine and Goergen (2011) argue that the role of incentivizing tools, such as compensation
rewards, is better understood if it is studied in the context of the firm’s overall corporate
governance. From this perspective, the central question is whether the traditional agency conflicts
that tend to plague the link between CEO pay and firm performance are mitigated by the strength of
corporate governance mechanisms.
We begin our cross-sectional analysis by examining how the role of compensation awards
varies with board independence. Prior empirical studies show that independent boards may help
mitigate the agency problems caused by the divergent objective functions between senior
management and shareholders (Ryan and Wiggins, 2004; Elbadry et al., 2015). Extending this
reasoning to the IPO setting implies that IPO firms with more independent boards are more likely to
ensure the effectiveness of CEO awards as motivating factor, and as a consequence, improve the
survival chances of the firm.
In addition to board independence, we consider the quality of the remuneration committee
due to its crucial role in the pay-setting process.18
Daily et al. (1998) note that the remuneration
committee should not be simply regarded as a complementary discipline mechanism performing
solely a monitoring role on the growth in executive pay. Instead, it should be viewed as an
organization device setting the appropriate reward structure for board members. As a result,
compensation packages are more effective incentivizing devices in the presence of strong rather
than weak remuneration committees.
Agency theory posits that the balance of power is also determined by the roles undertaken
by the CEO. For instance, a common belief is that combining the CEO-chairman role leads to
18
To do so, we construct a compensation committee quality index taking the first factor of applying principal
components analysis to five proxies of remuneration committee index: the compensation committee independence, the
percentage of outside directors on the compensation committee that were appointed after the current CEO took office, a
dummy variable, equal to one if the majority of outside directors on the compensation committee serve on three or more
other boards, and equal to one otherwise, the natural log of the number of directors serving on the compensation
committee, and the number of compensation committee meetings.

28
managerial power that may be excessive compared to the efficient levels suggested by optimal
contracts (Bebchuk et al., 2002). Similar arguments can be made with other proxies of managerial
power such as triality (i.e., when the CEO is both chairman and president), CEO tenure and CEO
ownership. To capture the common influence of the aforementioned factors we take the first
principal component, which we refer as CEO power. Accordingly, we anticipate that if managers
exercise their excessive power to act at their personal interest at the expense of the shareholders, the
pay-performance link will be weakened, and as such, the beneficial role of CEO pay on IPO
survival will be weakened in firms with powerful CEOs.
We apply a similar reasoning to another choice of organizational form, that is, firms with
founders and non-founders or professional CEOs. Compared to professional CEOs, founder CEOs
are more likely to exhibit entrenchment behavior, thereby influencing negatively post-IPO
economic outcomes (Shleifer and Vishny, 1989; Wasserman, 2003; Adams et al., 2009). However,
research also highlights certain positive aspects of founder-CEO leadership that would imply lower
agency costs. In fact, some researchers underscore the potential of lower agency costs in founder-
led firms due to the stronger psychological attachment and identification within the organization,
greater firm specific skills, and longer investment horizons relative to non-founder CEOs (e.g.,
Certo et al., 2001; Nelson, 2003). As a result, the potential for lower agency costs in founder-led
CEO firms is likely to be particularly beneficial in setting incentive arrangements, since it can
provide management greater flexibility in designing compensation contracts. This conjecture is
supported by empirical evidence showing that founder-CEOs are associated with lower total
compensation due to their stronger intrinsic motivation (He, 2008).
7.2 CEO Characteristics and Compensations Incentives
Murphy and Zaboojnik (2004, 2007) and Frydman (2017) report a secular increase in CEO
pay over the last decades and attribute it (to some extent) to the increasing demand for CEOs with
general managerial skills, whereas Gounopoulos and Pham (2018) confirm the existence of a
similar trend in the IPO market. Despite that the prevalence for hiring generalists CEO is often cited
as evidence for the efficient contracting approach, this practice may also have some undesirable
consequences to organizational outcomes. As opposed to specialist managerial skills which are
focused to particular firms and industries, general managerial skills are readily transferable across
firms and industries (Crossland et al., 2014). This translates into higher mobility in the CEO job-
market, suggesting that wealth of generalists is less contingent on the performance of the firm they
manage.

29
Additionally, given the tendencies of CEOs with varied career experiences to deviate from
pre-determined firm strategies (Hambrick et al., 1993), openness to experiences (Zimmerman,
2008; Boudreau et al., 2001), and preferences to experimentation and change (Crossland et al.,
2014), generalist CEOs will be inclined to undertake risky strategies without much concern about
such choices on the firm’s prospects. Based on this reasoning, Mishra (2014) argues that the risk
profile of a generalist CEO may be misaligned with the interests of the shareholders, thus
exacerbating the agency problems of the firm. As a result, we anticipate that the negative
relationship between CEO pay and IPO failure is weakened (strengthened) for firms with
generalists (specialists) CEOs.
Another managerial trait commonly used in the literature is CEO age or CEO tenure. The
advantage of these variables is that they capture the interplay between career concerns and real
investment decisions. Li et al. (2017) point out that career concerns are of particular importance
because managers are expected to deliberately adjust their investment behavior in order to influence
favorably the labor market perceptions regarding their abilities, reputation and future prospects. The
impact of career concerns is stronger for managers that are further away from retirement or
relatively new to the position, as these agents are more likely to capitalize market’s belief about
their abilities (Gibbons and Murphy, 1992). As a consequence, the effort exerted by younger or low
tenured CEOs is generally higher than that of older CEOs, which implies a greater effectiveness of
compensation schemes for such CEOs.
In Table 13, we break the sample on the median of each of the aforementioned variables and
examine in which subsamples the link between CEO pay and IPO failure is strengthened or
weakened. Our findings suggest a significant and negative association between total CEO
compensation and IPO failure risk that concentrates among firms with CEOs who are young,
specialists, founders, and with short-tenure. Additionally, our results regarding the positive relation
between remuneration and survivorship is pronounced in firms with less powerful CEOs and with
high governance quality.
7.3 Promotion Incentives – Tournament based Promotion Incentives
Kale et al. (2009) argue that, holding constant the magnitude of the tournament prize, the
effectiveness of pay gap as a motivator is strengthened when the probability of promotion to the
CEO position is relatively high. Motivated by this hypothesis, we attempt to obtain a clearer
understanding of the association between pay disparities and IPO survival, by assessing this
association in various settings that might affect the probability of promotion.

30
Yan and Rajagopalan (2004) argue that founder-CEOs possess high firm-specific capital and
are more psychologically committed to the long-term viability of the firm than professional CEOs.
Because their long-term interests are closely tied to their firms’ future prospects, we anticipate that
they are less likely to leave the firm they established. Hence, the probability of promotion for the
lower-ranked executives should be lower in founder-led CEO firms, which in turn, implies a less
negative relationship between pay gap and firm delisting.
On the contrary, CEOs that possess general managerial skills are more likely to take
advantage of a promising job market and undertake job-hopping, since their skills are easily
transferable across firms and industries (Giannetti, 2011). They also more easily recruited, as they
are increasingly sought after in the executive labor market (Custodio et al., 2013). As such, we
expect that the probability of promotion is higher in firms with generalist CEOs, and accordingly,
the negative impact of pay disparity on failure rates to be pronounced in firms run by generalists.
Lastly, prior literature mentions that when a CEO is old, and specifically close to retirement,
the likelihood of promotion for the other top management members should increase (e.,g., Jia,
2017). On the other hand, Kale et al. (2009) suggest that when the CEO is relatively new to the
position (i.e., with low tenure), then the other top executives have lower probability of promotion to
the position of CEO. Thus, our expectations are that the negative association between firm pay gap
and IPO failure is strengthened in firms with CEOs who are relatively old and with a long time in
the office.
In Table 13, we break the sample on the median of each of the aforementioned variables and
examine in which subsamples the link between pay gap and IPO failure is strengthened or
weakened. Consistent with our expectations, firms with high pay disparities tend to have lower
failure rates among firms with CEOs who are also non-founders, generalists, close to retirement,
and with high tenure.
8. Conclusion
The recent financial crisis along with the public outcry over the nature of the pay-setting
process have created a renewed interest on whether top executives meaningfully add value to the
companies they manage, and whether their pay arises in a rent extraction or an optimal contracting
framework. However, although these questions are central ones, empirical resolution of these issues
has been difficult. Murphy (2012) points outs that a possible explanation for the mixed empirical
evidence is that observed compensation arrangements result from both a combination of potentially
conflicting forces – executives’ desire to maximize their rents, and shareholders desire to maximize
firm value. Perhaps, more crucial though, is the fact that much of the debate about executive

31
compensation focuses solely either on the performance or the risk implications of executive
incentives rather than on outcomes that should potentially capture both of these aspects.
In this study, we attempt to address these issues by focusing on the IPO setting. Employing
survival analysis, we document that IPO firms with high compensated CEOs and large pay
disparities and have a lower probability of failure and a longer time to survive. In subsequent tests,
we find that the relationship between CEO pay and IPO survival is strengthened in environment
with lower agency conflicts, whereas the link between pay gap and IPO survival is pronounced
among firms with stronger internal promotion incentives.
Our findings are of relevance to academic researchers, business executives, and potential
investors interested in the ability of entrepreneurial firms to survive in the aftermarket.
Additionally, our focus on the interplay between compensation arrangement and IPO mortality
offers additional insights on the role of managerial incentives and informs the debate about the
controversial role of corporate executive pay. As such, our results might also be useful to
government regulators, policy makers, and other stakeholders interested on the role of governance
arrangements in stimulating growth and innovation.

32
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